Cure for Sarbanes Oxley
Sarbanes Oxley was put into place in the attempt to eliminate
the Enron incident: dishonest executives, deliberately misleading inventors,
bankers, and regulators. Unfortunately we are trying to legislate integrity and
honesty. It would be much easier to create set of checks and balances where
long-term goals would change behavior.
Simple Solution
Create a T Corporation (T for trust) that companies can
organize to if desired. The T Corporation would have the following
requirements:
- Separation of the office of CEO into Chairman of the Board and President (COB). The president runs the day- to-day affairs of the corporation. The COB reviews the performance of the president.
- The COB shall either own 1% of the company stock or have 10% of their net worth in the company stock.
- Require that 70% of board members have at least 3% of the net worth in the stock or 1% of the company stock which ever is least. The company can grant the stock or make it part of compensation in the form of options. Further the Board members will not have any relationship to the company such as consultants or suppliers. They can sell their stock 6 months after their departure. Further, these board members must have no previous relationship to either the COB or the President.
- President and COB shall be required to hold 1/4 of the compensation in common stock which cannot be sold until 12 months after they leave the company. So if a COB is compensated with $1 million, 250K must be in stock kept until 12 months after the COB leaves.
- Disclose all indirect compensation such as aircraft, life insurance, real estate for stockholder approval.
- Disclose all political contributions and donations.
- Stockholders with over 10% of the company stock can request a seat on the board.
- Stockholders with over 1% of the company stock can nominate board members.
- Companies which comply need only provide audited financial statements.
Background
In the past COB and President executives were commonplace.
The COB was often a large stockholder who hired the President to run the
company. The COB had shareholder interest because they were major shareholders.
How did this change? The change occurred slowly with the drop on the major
stockholding families and the rise in the mutual funds. The Mutual Funds became
the majority stockholders. Mutual Funds are
“renters of stock” with little interest in managing the company. Mutual
Funds tend to vote for management or sell the stock. The mutual fund companies have two reasons to
vote with management- 1. Large companies choose who will administer their 401K
investments. These investments are a large source of revenue in the form of
fees. Mutual Fund companies with aggressive voting records will be removed from
the 401K selection lists. 2. Mutual Fund companies do not wish to be involved
with management of the company. Further, if the Mutual Fund company doesn’t
like the policy-- they just sell the stock. This policy encourages an imperial
CEO who’s goal is short term gain.
Having a COB that owns a large position of stock puts some
“skin in the game” and makes the COB in line with long-term shareholders. Further the requirement to hold ¼ of the
stock for 12 months after their departure insures a long term prospective. When
the person leaves they will insure two things 1. The right person takes over
for them and 2. The company is well run when they leave.
Independent board with interest in the company. 70% of the
board members will be required to have substantial investment in the company. They
will want to see the company successful and will support a COB which has the
same view. They cannot sell their stock
for 6 months after they leave so it is in their best interest to support
successful management.
Disclosure of all payments to executives and political
organizations will allow shareholders to vote on how management is spending
their money. Is their corporation too active in politics at the expense of
business?
Many of the problems with large public corporations
(excessive CEO Pay, short-term gains vs. long-term growth, backdating stock
options, accounting restatements) can be linked to poor oversight by the board
of directors. The fact today is that too many corporate boards of directors are
hand picked associates of the CEO. If one examines many public company boards
closely, one will find: attorneys or consultants, which do work for the company
or the CEO, personal friends of the CEO, suppliers (subcontractors or bankers)
of the company. Often there is only 1 independent board member. A simple test
of independence of the board is CEO pay and stock performance--- Pay is
inversely proportional to independence of the board. Stock price appreciation
is usually follows an independent board. The more independent the board the
higher the stock price appreciation.
